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 Book
Excerpt:
The Best Investment Advice I Ever Received: Priceless Wisdom
from Warren Buffett, Jim Cramer, Suze Orman, Steve Forbes, and
Dozens of Other Top Financial Experts
by Liz Claman
ISBN: 0446578479
$23.99/U.S.
$31.99/CAN
240 pages
Warner Books
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The Best Investment
Advice I Ever Received
From The Greatest
Investor Of Our Time,
Warren Buffett
I was anchoring my financial news program one day when I looked in the
camera and announced to the viewers, "Billionaire investor
Warren Buffett just took a stake in an Israeli company. Is now
the time for you to be looking at Israeli companies as
a good investment?"
If Warren Buffett were watching, he might have burst out
laughing, or at least chuckled. And I certainly know why. If
there's one thing I've learned in my eight years as a financial
news anchor and reporter, it's that Warren Buffett buys
companies. He doesn't buy sectors, "ideas," or fads. If
he's considering buying a company-or a stake in a company-he'll
pick it apart like a kid sitting in a basement with an old
transistor radio, trying to figure out how all the wires and
tiny parts work. He didn't buy that Israeli company because he
believed Israel is the "next big thing." He bought it because
that particular company fit into his formula. And what a formula
it is.
Over the years, I've keenly observed Buffett's investing
style and had an opportunity to chat with him about the way he
invests. He once told me that when he was nineteen years old, he
read a book that changed everything for him when it came to
investing. He was at the University of Nebraska in 1949, and
during his last year of college, he bought a copy of Benjamin
Graham's The Intelligent Investor.
From that book, he learned what eventually became his own
three principles of investing, and he has followed those rules
for decades. Simple stuff, as he called it. His most important
principle is that you have to look at a stock as being part
of a business versus something that has a lot of flash
about it or something that your broker or neighbor simply tells
you about.
Buffett looks at a company and carefully assesses the
intrinsic value of the business. How do you do that? For
starters, look into the company reports and filings that the
Securities and Exchange Commission requires every publicly
traded company to provide investors. After reading and studying
it all, ask yourself whether this business is straightforward
and understandable. Does it have cash flow? What are its
longterm prospects? Are its earnings reports relatively
consistent? Does it have a solid, consistent operating history?
High profit margins? These are all important signposts Buffett
reads on the road before deciding to invest in a company.
The truth is, none of this is particularly complicated or
sophisticated, but very few investors seem to take the time to
follow these simple steps. But Warren Buffett does.
Buffett's second principle involves the investor's
attitude toward stock and market fluctuations. He once said
those fluctuations are there to serve investors rather than to
instruct them. Buffett believes investors should turn a deaf ear
to the day-to-day gyrations of the stock market. Good quality
companies can withstand these gyrations. Yes, they might suffer
a quarter or two, but in the long-term, they'll stand tall and
strong. Buffett's best manifestation of his ability to ignore
market hysteria came during the dot-com glee of the late 1990s.
He simply wouldn't allow the stock market hysteria going on at
that time to "instruct" him to abandon his tried-and-true
formula. Over time, it was clear that this was a solid strategy
that paid off in spades for his company and his investors.
His third principle involves the margin of safety.
That means, as Buffett once put it, you're never that precise in
your ability to calculate the worth of a stock but what you can
do is estimate. He has often said investors should find
properties where there is a wide discrepancy . . . and if you
can buy them at two-thirds of what they're worth, do it. How
does an investor accomplish that? As you pick through company
reports and filings, add up the numbers and ask yourself whether
the price of the business (or stock) is lower than its value. In
other words, if you can calculate that a company's stock is
worth between $80 and $120, and you can buy it at $60, then buy
it.
Year after year, Buffett bakes up his investment cake with
the very same ingredients as the year before, with a sprinkle of
humor tossed in. A perfect example comes from his letter to
Berkshire Hathaway shareholders back in 1995 (Buffett, of
course, is the chairman and CEO of Berkshire Hathaway, Inc.):
Charlie Munger, Berkshire's vice chairman and my partner, and
I want to build a collection ofcompanies-bothwhollyandpartly
owned-that have excellent economic characteristics and that are
run by outstanding managers. Our favorite acquisition is the
negotiated transaction that allows us to purchase 100 percent of
such a business at a fair price. Butweare almost as happy when
the stock market offers us the chance to buy a modest percentage
of an outstanding business at a pro rata price well below what
it would take to buy 100 percent. This double-barreled
approach-purchases of entire businesses through negotiation or
purchases of part-interests through the stock market-gives us an
important advantage over capital-allocators who stick to a
single course. Woody Allen once explained why eclecticism works:
"The real advantage of being bisexual is that it doubles your
chances for a date on Saturday night."
Over the years, we've been Woody-like in our thinking,
attempting to increase our marketable investments in wonderful
businesses, while simultaneously trying to buy similar
businesses in their entirety.
But Warren's so much more than the companies he's bought and
sold. Warren Buffett is considered by many to be one of the
so-called good guys of American business. He's the first to take
the blame when his own company's numbers aren't up to his or
shareholders' standards. In his 1999 letter to shareholders he
wrote, "The numbers on the facing page show how poor our 1999
record was. We had the worst absolute performance of my tenure
and, compared to the S&P, the worst relative performance as
well... Even Inspector Clouseau could find last year's
guilty party: your chairman."
And he's always ready to talk about the mistakes he's made
and the lessons he's learned. In his shareholder letter way back
in 1989, he wrote:
If you buy a stock at a sufficiently low price, there will
usually be some hiccup in the fortunes of the business that
gives you a chance to unload at a decent profit, even though the
long-term performance of the business may be terrible. I call
this the "cigar butt" approach to investing. A cigar butt found
on the street that has only one puff left in it may not offer
much of a smoke, but the "bargain purchase" will make that puff
all profit.
Unless you are a liquidator, that kind of approach to buying
businesses is foolish. First, the original "bargain" price
probably will not turn out to be such a steal after all. In a
difficult business, no sooner is one problem solved than another
surfaces- never is there just one cockroach in the kitchen.
Second, any initial advantage you secure will be quickly
eroded by the low return that the business earns. For example,
if you buy a business for $8 million that can be sold or
liquidated for $10 million and promptly take either course, you
can realize a high return. But the investment will disappoint if
the business is sold for $10 million in ten years and in the
interim has annually earned and distributed only a few percent
on cost. Time is the friend of the wonderful business, the enemy
of the mediocre.
The one certainty I've learned over the years about Warren
Buffett is that he is anything but mediocre. His honesty, his
obdurate opposition to business shenanigans, and his concern for
his shareholders is so palpable. His three simple principles-so
easy for the average investor to understand and follow-have made
him arguably the most closely followed and widely imitated
investor in history.
LIZ CLAMAN
Copyright of the compilation © 2006 by Liz Claman
Foreword copyright © 2006 by Paul O'Neill
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